RBI’s capital buffer norms good for banks, says Moody’s Credit Outlook

This will compel banks to conserve capital and moderate their balance sheets during periods of fast credit growth, feels the rating agency

GN Bureau | February 12, 2015


#reserve bank of india  

Last week’s guidelines on maintaining a countercyclical capital buffer (CCCB) by Reserve Bank of India has been hailed by the global credit rating agency Moody's .

The guidelines are credit positive for Indian banks because they make clear that banks will be required to hold the additional capital amid periods of rapid credit growth, according to an article in Moody's Credit Outlook.

The guidelines maintaining CCCB is not expected to get activated in 2015 but "nevertheless, these guidelines provide the RBI with a tool to compel banks to conserve capital and moderate their balance sheets during periods of fast credit growth, which would benefit the banks' credit quality," the Moody's said.

According to Moody's, India's domestic credit/gross domestic product (GDP) ratio has consistently increased over the years.

The level at the end of March 2014 stands at 80.2 percent, which remains within the three percentage point acceptable range of the five year average of 78.2 percent, according to an article in Moody's Credit Outlook.

The guidelines on CCCB act as an additional layer of loss-absorbing capital on top of the banks' increased minimum capital requirements under Basel III.

Basel III gives regulators in individual jurisdictions the discretion to implement a CCCB of up to 2.5 percent of risk weighted assets when they see fit, to offset pro-cyclicality by requiring banks to hold more capital at times when the regulator judges that the macro-financial environment could encourage excessive risk-taking.

According to Moody's, corporate loans, which account for about 80 percent of Indian banks' loan exposure, have negatively affected banks' asset quality owing to high corporate leverage, and the asset quality of loans to households have been relatively stable.

Thus, the RBI has focused its triggers on overall domestic credit and the health of banks and corporates to sustain the increase in credit.

According to the RBI's guidelines, the key trigger for activating the CCCB will be when the credit/GDP ratio has risen relative to its long-term trend.

The RBI said it will require banks to hold the full 2.5 percent buffer when the gap between the credit/GDP ratio and the long-term trend exceeds 15 percentage points.

The central bank will implement a CCCB of less than 2.5 percent when the gap is between three and 15 percentage points, with the size of the required CCCB increasing on a graduated scale.

Although the credit/GDP ratio will be the key trigger, the RBI said it will maintain its discretion when reducing the CCCB, and will also look at other indicators, including banks' ratios of loan to deposits, non-performing assets and interest coverage.
 

Comments

 

Other News

Reopening: Old guidelines extended to November

As the Covid-19 situation continues to improve in India, the ministry of home affairs (MHA) has decided to continue the Guidelines for Reopening, which have already done away with nearly all of Lockdown restrictions in areas outside the containment zones. The MHA issued an order Monday and e

India records lowest new cases in three months

After a scare in September with the number of daily fresh cases inching above 90,000, India seems to have gone down the peak, with several key parameters giving cause for relief just in time for the annual festive season. The new confirmed cases in the 24 hours to Tuesday morning have fallen below 36,500 (

India’s case fatality rate lowest since Janata curfew

The annual festive season has brought good news for India: the country’s case fatality ratio has gone down to touch 1.5 percent, and the number of deaths per day has dipped below 500 in the 24 hours to Monday morning – bringing the situation closer to the number before the lockdown was imposed

“Script is the real hero”

Basking in the success of the new web series, ‘Scam 1992: The Harshad  Mehta Story ’,on SonyLIV, the OTT platform from Sony stable where the lead actors are new faces, NP Singh, MD and CEO of Sony Pictures Networks, has said that the script is the new hero. He credited the s

India’s active cases below 10% of total cases for three days

India’s trend of steadily decreasing active cases continues unabated. The number of Active Cases has remained below 10% of the total cases for the last three days, suggesting only one in 10 cases is active Covid-19 patient. The active cases comprise merely 9.29% of the total positive c

Cabinet clears bonus for non-gazetted employees

The union cabinet chaired by prime minister Narendra Modi on Wednesday gave its approval to pay productivity linked bonus (PLB) for 2019-20 to 16.97 lakh non-gazetted employees of commercial establishments like Railways, Posts, Defence, EPFO, and ESIC, with a financial implication of Rs.2,791 crore.

India Police Virtual Summit and Awards 2020

Archives

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter